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Concepts of Cost

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notes

A) Cost Concepts :

When an entrepreneur undertakes an act of production, he has to use various inputs like raw material, labour, capital etc. He has to make payments for such inputs. The expenditure incurred on these inputs is known as the cost of production. Cost of production increases with an increase in need of output. There are three types of costs which are as follows : 

1) Total Cost (TC) :

Total cost is the total expenditure incurred by a firm on the factors of production required for the production of goods and services. Total cost is the sum of total fixed cost and total variable cost at various levels of output.
TC = TFC + TVC
TC = Total cost
TFC = Total Fixed Cost
TVC = Total Variable Cost

Total Fixed Cost (TFC) :

Total fixed costs are those expenses of production which are incurred on fixed factors such as land, machinery etc.

Total Variable Cost (TVC) :

Total variable costs are those expenses of production which are incurred on variable factors such as labour, raw material, power, fuel etc.

2) Average Cost (AC) :

Average cost refers to cost of production per unit. It is calculated by dividing total cost by total quantity of production.

`"AC"="TC"/"TQ"`

AC = Average cost
TC = Total cost
TQ = Total quantity
For example, If the total cost of production of 40 units of commodity is ₹800 then the average cost is :

`"AC"="TC"/"TQ"`

`= "800"/"400"`

=₹20 per unit 

3) Marginal cost (MC) : 

Marginal cost is the net addition made to total cost by producing one more unit of output. 
MCn = TCn – TCn-1
TCn = Total cost of nth unit
TCn-1 =
Total cost of previous units

If previous total cost of producing 4 units is ₹200 and total cost of producing 5 units is ₹ 250, then : 

MCn = TCn – TCn-1

= ₹250 – ₹200
 = ₹50

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